It will be Mark Carney’s last MPC press conference as BoE Governor on Thursday. The decision on whether to cut rates or not is still finely balanced. The probability of a cut to 0.5% was as high as 75%. However, following the stronger employment and PMI surveys last week, that probability has fallen below 50%. The rebound in the UK services PMI was particularly strong reaching a 16-month high of 52.9. Manufacturing PMI rose to 49.8 leaving the composite PMI at 52.4 – the highest since September 2018. The CBI retail survey and the GfK consumer confidence will be released next week.
The PMI suggest a quarterly pace of GDP growth of about 0.2%. This is below trend, however, the strength of the improvement in sentiment across a number of surveys since the Election points to a more general pickup in the economy. This reduces the case for a rate cut, whilst the BoE’s update may point to less spare capacity than previously thought. By leaving rates as they are and waiting for further data, MPC members will be able to take into account the expected fiscal stimulus in the Budget on 11 March.
The EU Withdrawal Bill completed its passage through the UK Parliament last week, which means the UK will leave the EU on Friday, once approved by Europe.
GBPEUR – 1.1841
GBPUSD – 1.3063
The EU Withdrawal Bill is expected to be approved by the European Parliament on Wednesday. That will pave the way for the UK to formally leave the EU at 23:00GMT on Friday 31 January. At that point, the UK enters a transition period until the end of the year. There could be an extension but the UK government has ruled this out. The relationship with the EU will remain the same while a new deal on future relations is negotiated.
In the Eurozone, Q4 GDP is estimated to have risen by 0.2%, slightly down from 0.3% in Q3. Germany doesn’t release its Q4 report until next month. The full-year German GDP growth estimate of 0.6% implies a small expansion. The more forward-looking German IFO survey is forecast to show a rise to 97.0 for January. This would be a third consecutive increase and a 7-month high. We also expect a rise in the Eurozone economic confidence index to 102. The ECB left policy unchanged and announced the start of a strategic policy review. The recent data seems consistent with the ECB view that the downside risks to the economy have reduced.
EURUSD – 1.1032
EURGBP – 0.8445
The US Federal Reserve’s policy announcement will probably have less tension than the BoE decision. FOMC members have said the economy is in a good place after three rate cuts last year. No policy change is expected. US fourth quarter GDP is expected to be broadly similar to previous. We expect a slight improvement to 2.3% from 2.1%. The December core PCE deflator inflation measure is expected to be unchanged at 1.6.
There will be ongoing attention on the coronavirus outbreak in the city of Wuhan, a manufacturing hub in central China with a population of about 11 million. Reports suggest that 26 people have been killed so far, with concerns about the spreading of the virus, especially with China beginning its week-long lunar New Year holiday. The World Health Organisation decided not to declare a public health emergency, but it will deliberate again in ten days or sooner if necessary.
GBPUSD – 1.3063
EURUSD – 1.1032
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*Interbank rates correct as at 7 am on the date of publishing.